BCB may hike bank rate in September

The BCB decided to raise the bank rate by another 50bp to 14.25% at the July Copom meeting. In describing the decision, the Copom statement included one critical change, with the BCB adding the phrase "current balance of risks" to the macroeconomic and inflation outlook. Societe Generale notes the bank's statement "the Committee understands that maintaining this level of the basic interest rate for a sufficiently long period is necessary for the convergence of inflation to the target in late 2016." 

According to Societe Generale, "this new sentence conveys the BCB's flexibility to react as the situation demands rather than its willingness to leave the bank rate at this level in the near future. The minutes are expected to provide more clarity on this. With inflation now way above target (irrespective of the impact of a rise in administered prices), the central bank could feel obliged to raise rates further, particularly if there are undesired developments on the BRL front. BCB is expected to hike rate by 25bp in September. Not raising rates would probably invite further pressure on the currency and a further acceleration of inflation expectations."